Tokyo FinTech
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Tokyo FinTech

Financial Crime is Everywhere

Financial crime is everywhere. That includes the blockchain. And cryptocurrencies. Two recently published reports highlight how ineffective measures against financial crime in “traditional” finance are, even after billions of dollars in fines, and billions of dollars spent on fortifying the Anti-Money-Laundering (AML) and Know-Your-Customer (KYC) processes. The notion that we do not need to worry about financial crime in the crypto space, because there are already enough crooks in traditional finance, is ridiculous and does us all a disservice. As even the largest cryptocurrency exchanges like Binance are fleeing from regulation, it should be clear that there is at least as much crookery going on in crypto as everywhere else. And in the worst case, this crookery is associated with slavery and human trafficking, so it is far from a victimless crime, and it does concern us all.

The aforementioned reports that crossed my desk recently are the 2018 survey report “Revealing the true cost of financial crime” by Thomson Reuters, and the UK’s National Crime Agency’s “National Strategic Assessment of Serious and Organized Crime 2018”.

Source: Thomson Reuters, “Revealing the true cost of financial crime”

Thomson Reuters highlights that the surveyed companies spend on average 3.1% of annual turnover combating financial crime, for an aggregate of USD 1.28 trillion — that is a huge tax on these businesses. Despite this expenditure, the survey revealed that 47% of organizations have been a victim of at least one type of financial crime in the last 12 months, with 66% of German companies experiencing financial crime and 20% in Russia.

In this report, Rob Wainwright, former Executive Director at Europol, highlighted that barely 1% of criminal proceeds generated in the EU are estimated to be confiscated by relevant authorities. “Professional launderers — and we have identified 400 at the top, top level in Europe — are running billions of illegal drug and other criminal profits through the banking system with a 99 percent success rate.” Yet global banks are spending billions of dollars each year meeting stringent AML regulations. However, only 5% of those transactions highlighted to the banks’ compliance officers reach the threshold of being reported to the authorities, and only 10% of those reported ever lead to a meaningful investigation.

So we can have the argument in two ways: with so much inefficiency and ineffectiveness in combating financial crime in fiat currency, why would any crook go through the hassle of moving crypocurrencies around (which, at this point, would need to cross the crypto/fiat barrier at some point to be useful in the real economy)? On the other hand, why would anyone assume that the level of crookery in crypto is any less?

Source: NCA, “National Strategic Assessment of Serious and Organized Crime 2018”

Here are a few selected quotes from the 58-page report from the UK’s National Crime Agency:

The use of technologies such as the dark web, encryption, virtual private networks (VPN) and virtual currencies will support fast, ‘secure’ and anonymous operating environments, facilitating all levels of criminality. The increasingly ubiquitous ‘by default’ nature of these enabling technologies will continue to lower the barriers to entry for some types of cyber enabled crime.

Generally-trusted, anonymous payment systems are the key enabler for dark web trade. Bitcoin is the preferred payment method, although various marketplaces and forums offer additional cryptocurrency options, including Monero and Ethereum. There are also a host of enabling services underpinning the dark web economy, including bitcoin mixing services, virtual currency exchanges, hosting services, onion web services and user confidence tools such as multi-signature wallets.

Those who want to point out that cash provides the most anonymous path to value transfer, are right, of course.

Cash is a frequently used tool in money laundering, offering anonymity and providing a break in the audit trail at any stage of the laundering process. Cash intensive businesses, such as scrap metal wholesalers, nail bars and takeaways, and some firms in the regulated sector (e.g. MSBs), continue to be used to disguise illicit money.

However, cryptocurrencies have their benefits for cross-border and high value transfers.

We assess that criminals will increasingly use cryptocurrencies to move illicit funds across borders. The value of cryptocurrencies is significantly volatile, but their relatively high price (of Bitcoin — BTC - in particular) makes it easier to transfer large amounts of fiat currencies in smaller volumes of cryptocurrencies.

And not all crime is related to an actual money transfer, it could be as simple as the theft of computing power.

Cryptomining malware, which infects a victim device and surreptitiously mines cryptocurrencies, has increased during this period. According to industry, more than 1.65 million computers worldwide were infected with cryptomining malware during the first nine months of 2017. We assess it is highly likely that deployment of cryptomining malware has increased even further in the period since October 2017 — driven to a large extent by the general increase in exchange rates of cryptocurrencies such as Bitcoin.

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